The First Investment

Introduction

A few years ago, I decided it was time to introduce my daughter, Isabela, to the world of investing. When she was eight years old, I assumed it would be as simple as it had been with her brother, Francisco, who genuinely enjoyed picking individual stocks and tracking market trends. But Isabela was different. She'd much rather spend her time playing soccer, tennis, or hanging out with friends than staring at stock charts or financial news. Her lack of interest made me realize something important: many people don't find investing inherently exciting. They simply want an effective, hassle-free way to build wealth without needing constant attention or deep market knowledge. For someone like Isabela, as well as other children or adults in the early stages of their investment journey, the S&P 500 is a reasonable first investment. It's simple, effective, and low-maintenance.

Listening to Warren Buffett

When you turn on the news—say, CNBC—on any given weekday, you're bombarded with an overwhelming flood of information, expert opinions, and seemingly brilliant people urging you to jump into the market immediately, exit before it's too late, or constantly trade individual stocks. It's endless and exhausting. But one piece of advice that has always resonated with me comes from Warren Buffett, arguably the greatest investor of our time: keep it simple. Buffett has long championed the S&P 500 as the best option for most investors, emphasizing that buying a low-cost index fund and holding it for decades is the smartest strategy. In fact, in 2007, he made a famous $1 million bet that the S&P 500 would outperform a selection of hedge funds over ten years. By 2017, the S&P 500 had gained 126%, while the hedge funds returned only 36%, proving his point: simplicity wins in the long run.

The Power of Compounding

Einstein once said that compound interest is the most powerful force in the universe. In the world of investing, compound interest refers to how investment returns themselves generate additional returns. The average Compound Annual Growth Rate (CAGR) of the S&P 500 since its inception in 1957 (through December 2023) is approximately 10% when including reinvested dividends (total return). This is the nominal return (not adjusted for inflation), so let's assume one could get about an 8% real return per year from the stock market—reasonable given historical trends.

Imagine you start investing at age 25, putting aside $500 every month into an S&P 500 index fund. Assuming an average annual return of around 8%, after 30 years of disciplined, consistent investing, your total investment of $180,000 could grow to approximately $745,000. This dramatic growth isn't guaranteed, of course, but it illustrates the power of consistency over complexity, and how wealth builds more wealth through the power of compounding.

Playing the Odds

In our opinion, the most crucial aspect of investing is understanding risk—specifically, how much you could potentially lose. Investing in the S&P 500 isn't risk-free. Short-term fluctuations can be significant. However, unlike playing blackjack in Las Vegas, where each hand is a discrete event with fixed odds against you, investing dramatically shifts the odds in your favor the longer you're willing to wait. Historically, the likelihood of losing money in the S&P 500 decreases substantially over extended periods.

To better understand these risks and rewards, let's consider again investing $500 monthly in the S&P 500 across various historical scenarios (these are all estimates, so feel free to re-run the figures using your own data set):

"But the S&P 500 Is Not Perfect"

Critics rightly argue that solely investing in the S&P 500 has its limitations. International markets sometimes outperform (they are outperforming at the time of this writing), bonds help cushion volatility, and the index's heavy weighting toward tech stocks can heighten risks during downturns. These are valid concerns, but they don't diminish the S&P 500's appeal for novice investors.

Investing in the S&P 500 is akin to going to the gym—success isn't about finding the most sophisticated routine, but about consistently showing up. It provides a solid foundation and a stepping stone to more complex investment strategies. Arguably, before diving into individual stocks, options, or advanced trading techniques, mastering the fundamentals should come first. The S&P 500 offers an accessible and effective way to do just that.

Final Thoughts

Isabela's simple approach is to allocate 50% of her "earnings"—from allowances, gifts, and chores—toward essentials like Boba tea, Safeway candy, and other must-haves for a 12-year-old. The other 50% goes straight into her Robinhood account to purchase the S&P 500 ETF (VOO or SPY). She follows a true set-it-and-forget-it strategy and, surprisingly, sometimes outperforms her brother's more complex trading approaches. That might be an even more exciting achievement for her than making money!

The S&P 500 is the ideal starting point for any new investor.